Impaired-Loan Ratio Of Indian Banks To Fall In FY25, FY26: Fitch

While the asset quality of Indian banks is prone to risks emerging from increasing stress in their unsecured retail loan portfolios in 2025, Fitch Ratings expects impaired-loan ratio to fall, it said in a press release.

The global rating agency expects banks' impaired-loan ratio to fall by 40 basis points to around 2.4% for the current financial year and a further fall of 20 bps in the next financial year. This is despite expecting new bad loans in both years to be around 25% higher than the figure for 2023-2024 (Apr-Mar).

This has come as rapid retail lending growth in recent years, especially in the unsecured loan segment, poses heightened medium-term risks.

However, Fitch still expects impaired-loan ratio to fall in both years, led by robust loan growth, recoveries and write-offs, which are expected to offset the increase in fresh bad loans.

Reserve Bank of India expects impaired-loan ratio to trough in the current financial year before rising to around 3% in the next year. In the first half of this year, impaired-loan ratio was 2.6%.

"We believe the difference from our forecast partly reflects variance of opinions on the timing and extent of risk crystallisation, banks' exposure at risk, loan growth and India's economic performance," it said.

Despite India's household debt remaining low at 42.9% of GDP as of June 2024, compared to many Asia-Pacific emerging markets, stress in unsecured retail loans has been rising, comprising roughly 52% of new bad retail loans in the first half of this year.

"The impact of defaults on unsecured loans could be amplified as approximately 50% of borrowers reportedly hold at least one other, often high-value secured retail loan, such as a housing or vehicle loan, which could also be affected in the event of default," Fitch said.

Currently, lending stress appears to be concentrated in unsecured personal loans of less than $600. Large Indian banks' exposure to such riskier loans may be proportionally lower than that of the system, but they are not completely insulated, given their high loan growth appetite and increased digital lending in recent years.

Banks may also have indirect exposure through funding to non-banks and fintechs, which are more exposed to low-income borrowers, it said.

Fitch believes that risks could spill over to the higher income categories in a market downturn, given the correlation between rapid unsecured personal loan growth and increased retail participation in financial markets. However, borrowers in these categories should exhibit greater resilience, it added.